Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Will Apple Inc. Follow LG Electronics’ Lead and Try to Cut Qualcomm Out?

A recent announcement from LG could signal interesting longer-term implications for the mobile chip market.

Smartphone vendor LG Electronicsannounced recently its very first in-house mobile applications processor, dubbed Nuclun. This looks like a fairly standard mobile system-on-chip with ARM (NASDAQ: ARMH) Cortex A15/A7 cores, but it has one twist: it allegedly has a built-in category 6 LTE-Advanced baseband.

So what in the world does this have to do with Apple (NASDAQ:AAPL) potentially trying to cut chip giant Qualcomm (NASDAQ:QCOM) out of its phones?

Quite a lot, actuallyIt is widely acknowledged that Qualcomm builds the world's best cellular baseband solutions. Apple uses stand-alone Qualcomm modems in its popular iPhone family of products. Many top Android smartphones, too, including the Samsung (NASDAQOTH: SSNLF) Galaxy S5, LG G3, and HTC One M8, feature Qualcomm Snapdragon processors with integrated LTE modems.

However, Samsung has been aggressively pursuing in-house baseband efforts (some variants of the Galaxy Note 4 feature Samsung's own Exynos Modem 303, an LTE-Advanced category 6 baseband). Huawei, too, recently announced a system-on-chip with its own category 6 LTE-Advanced modem.

It would be a complete and utter shock to me if Apple is not pursuing its own cellular baseband efforts, particularly given that it has been widely reported to have hired a number of RF engineers. In fact, if one goes to Apple's job boards and searches for "RF," a number of positions for RF chip design engineers show up.

Given that these companies seem to be pouring in the development dollars to build their own modem solutions, I would imagine that over the long term, one of two outcomes occurs for any given phone maker that tries to build its own chips:

Qualcomm runs so far ahead of the company's in-house modem solutions efforts that it shutters its system-on-chip/baseband development efforts as the return on investment isn't there; or

The company actually catches up with what Qualcomm is doing and cuts the chipmaker out.

For the record, I think Qualcomm is a very formidable competitor and that most of the companies trying to develop their own basebands will simply exit the business. For example, I believe LG, whose mobile business reported a loss in its most recent quarter, likely won't be able to justify the research and development expenses of building its own chips over the long term.

However, I think Apple is different.

Apple makes a lot of money; it can afford to build its chipsUnlike the majority of the players in the smartphone market, Apple is wildly profitable. In fact, fellow Fool Evan Niu points out that Apple is on track to rake in $14.4 billion of honest-to-goodness generally accepted accounting principles net income this quarter. To put this into perspective, if Qualcomm hits the high end of its guidance, it should generate about $7.9 billion in GAAP net income for all of 2014.

If it truly is a strategic imperative within Apple to eventually cut Qualcomm out (it's not clear at this point if this is the case), then I think over the long term Apple could build its own baseband and RF chips for iPhones. It can afford to buy the assets and hire away the talent that it needs to in order to eventually pull this off.

Not likely anytime soon, thoughNote, though, how I'm qualifying these statements with long term and eventually; it would likely be years before Apple could equip its iPhones with in-house cellular chips, if it chose to do so.

In fact, I'm surprised that, in light of the fact that Apple seems interested in doing a baseband, it didn't acquire Renesas Mobile before Broadcom (NASDAQ: BRCM) got it. I was doubly surprised when Apple didn't buy Broadcom's baseband business (which is being shuttered at this time) when it was put up for sale.

If Qualcomm can stay significantly ahead of its competition, particularly the in-house chip teams of its own customers, then it should be relatively safe from what seems to be a flood of customers trying to manufacture their own chips. However, if any company has what it takes to develop viable cellular solutions over the long run, I'd put my money on Apple.

Author

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. He can be reached on Twitter -- follow him there: Follow @tmfchipfool